Ex-CIO Spends Venture Capital on More Than Just Tech

Venture capitalist Pete Solvik applies the lessons he learned as Cisco's CIO to make investment decisions. Lesson No. 1: People and strategy count as much as hot products.

Pete Solvik knows a thing or two about rapid growth. As a senior executive at Cisco Systems Inc. from 1993 to 2002, including a seven-year stint as CIO (the company's first), he was part of a management team that took sales from under $500 million a year to almost $20 billion. He ended his tenure at Cisco as a senior vice president with responsibility for global information technology, Internet initiatives and productivity strategy, reporting directly to CEO John Chambers.

These days, Pete Solvik hunts for the next wave of growth companies as a managing director with California venture capital firm Sigma Partners, where he invests in early stage technology firms. He specializes in finding and funding start-ups that aim at solving specific IT problems for big corporate users, drawing on his extensive network of business contacts, and his own experience as a CIO, to choose small companies that have the right mix of technology, strategy and leadership to thrive in the real world.

Among the investments he has led for Sigma are stakes in Digital Fuel Technologies Inc., a maker of software that manages service level agreements, whose customers include Siemens AG and Procter & Gamble Co.; the data-replication and recovery software firm Topio Inc., which is used by service providers including IBM Corp.; and Encover Inc., a service-contract software vendor that counts Xerox Corp. and Eastman Kodak Co. among its customers.

Solvik, who graduated from the University of Illinois at Urbana-Champaign with a degree in business administration and a concentration in information systems, says mastering the mix of business strategy and tech knowledge is the biggest challenge for both big-company CIOs and start-ups. "That complexity, that diversity of skills and knowledge is what you need to be successful, and for your overall organization to be successful, at any level," he says.

Solvik spoke with Senior Writer Edward Cone about what makes big companies tick, and about what it takes to make small companies into large ones.

CIO INSIGHT: What are the primary factors that you look for in a company when you are considering a venture investment?

SOLVIK: We look at investment opportunities that are oriented toward enabling growth at the companies that will buy the product, early-stage companies that are oriented toward reducing complexity and cutting costs, and companies concerned with reducing threats in the area of securitythat kind of thing. It clearly has to be something that's solving a growing problem for potential customers. What we look for is a company that is producing a technology or an idea that can be sold directly to large corporations. Or it could be an enabling technology that gets sold to other technology companies that then produce it and sell it to the public or large technology companies.

Security continues to be a broadly defined growth area, in terms of both investment level and the size of the problem. It's pretty high on the IT budget. Another key area involves the switch-out at the data center from legacy technologies to newer technologies based on things like open-source, blade computing and storage-area networks. Another is a cost-effective management framework for a very different computing paradigm involving application servers and composite applications and Web services. Although certain costs in the new computing architecture have come way down, such as the cost of buying a server and buying a software license, other costs of managing that complexity and managing very high availability and responsiveness in this new architecture are still being worked on.

When you say you hear from large companies, is part of your due diligence speaking to CIOs you know from when you were at Cisco? And is your investment strategy tied tightly to their corporate technology cycles?

We have a number of ways of analyzing the market. One is that we actively maintain relationships with IT buyers and senior executives to understand what's on their priority lists. We try to understand which areas are passé and already solved, and which they're really looking to their existing strategic suppliers to solve, versus the areas in which they feel their existing suppliers are unlikely to innovate.

Also, we would never make an investment without speaking to existing customers, prospective customers, and customers of competitors of the company, to understand how that market, that technology, that product and team were perceived. Now, having said that, if all you looked at were companies that were capitalizing on ideas and solving problems that were already defined and well known in the market, then you're not looking at things that are maybe five to ten years away.

We try to look at the great teams that are coming up with ideas that are a few generations out, that prospective customers maybe haven't thought about yet. That's risky. I mean, how many years have people been saying that this is the year of Web services, or of service-oriented architectures? And instead of it being a big wave, it's tending to be a very, very slow buildup. A lot of the momentum is going to depend on when the very big established suppliers, the Oracles, SAPs and IBMs, release their new products based on those architectures as much as when some new innovative start-up introduces something. Sometimes an entire market has to help make the move.

You mentioned that one of the most important things you look for is a great team. Is it right to say you would never go on tech alone?

In investing in a tech start-up, the quality of the team, the quality of the people, is right up there in importance with the market opportunity and the product. So we might run into a market opportunity we think is excellent and a product we think is pretty darn good, but the team is not the right team for us to bet on. We don't think a company like that is going to win.

One of the primary reasons is that very young technology start-up companies rarely have the formula properly defined when they come and look for a first round of investment from us. Any start-up is going to hit big forks in the roadmore likely 90-degree turns, and not uncommonly U-turns. The ability of a team to be able to react to those major changes and make the right decisions and implement the right strategies to deal with huge mistakes and missed opportunities and poor analysis of the market is paramount for that company to ultimately succeed.

So the team is absolutely mandatory. And I'll tell you, it's a unique breed of people that will start as a group of three, four, five people and create a successful venture-funded, high-tech start-up. It's not just some good people. Ideally, they've been on a winning team as well as a losing team before, because you learn just as much from failure as from success. A lot of people say you learn more. And it requires just an unbelievable amount of energy and passion and enthusiasm and resilience, as well as business and technology acumen.

Getting the right mix, that magical team that comes together to make a start-up really successful, is not dissimilar to having an IT leadership team and a business leadership team at a much larger companyteams that come together with the right chemistry to result in the company being able to use IT for competitive advantage.

What else do big companies tell you they are looking for from the kind of companies you fund?

Well, I can tell you what is not on the list. And that is a traditional, high-risk, high-expense, low-rate-of-success implementations of complex application packages. The kind of company where all the money goes to the vendor upfront, and all the risk lies with the customer. A three-year implementation of a monolithic piece of software, with very complex integration, a big up-front license fee, and the risk being on the buyer rather than the seller, does not get a lot of traction. That era is over.

When corporations look at technology from small innovative start-ups, they expect a very different delivery model. They want business solutions to solve business problems, which fundamentally is application software delivered in some way, shape or form. They want it implemented quickly, and they want shared risk between the customer and the vendor, meaning that if the project doesn't succeed, the vendor doesn't still get to run all the way to the bank. They're looking for a more clear return on investment that is going to be easier to achieve without massive business process reengineering, which is high risk. And sometimes they're looking for flexibilitymaybe the application being delivered as a managed service.

But are large companies willing to buy directly from these smaller start-up vendors?

I think many companies realize it is difficult for the very large technology suppliers to develop the most innovative solutions. And so companies need to push those large tech suppliers to continue to acquire companies for innovation purposes, as well as continuing to buy directly from smaller, innovative, venture-funded technology start-ups, to solve their most pressing tech problems.

When a small technology start-up goes to market in partnership with an existing supplier, that is often a big plus. It's not the only way to get success, but it's certainly one we like. It gets faster market traction and faster credibility. Customers like it, too. In fact, customers frequently drive it. It's one reason that acquisition activity by the big players is up significantly.

How fast can products actually go from the drawing board at a start-up to regular use at a large corporation?

In areas that are changing rapidly, like compliance issues related to Sarbanes-Oxley, things can happen very quickly. I've seen products in that area move to market within a couple of years. Storage continues to change very rapidly, and there are companies that just in the last three years have gone from idea or initial product to pretty good market traction.

The same is true of enabling technologies such as semiconductors and electronic design automation. Wireless is another great example. We're in a number of companies that are selling wireless applications, and more companies are seeking easier access to critical information and applications through wireless and handheld platforms. So we have a whole host of areas where I would say there's been good business take-up, and some companies that we think are very promising that we've just invested in maybe two, three, four years ago.

At the same time, the cycle from innovation to venture capital funding to corporate use is not even close to what it was the latter half of the 1990s, and I think it would be foolish to bet on that happening again any time soon. I think we're in more of a typical cycle now than in those years, and also more typical than maybe 2001 to 2003, which were very slow and difficult years. I'm not saying that happy days are here again. It's just that it's kind of back to the normal adoption cycles that we've seen over a long historical period of IT.

How can a big-company CIO expect to keep up with all this technology change and still be an integral part of the business team, keeping up with strategy and even corporate politics?

Being a successful CIO is a very complex and underappreciated job. It's a difficult job. You can't be purely a technologist; technology-driven CIOs can't achieve the necessary level of business partnership. You may still have to educate business management to look at IT as a key, strategic, enabling component of the successful business, even in this day and age.

But on top of all that, technology continues to change. Delivering the day-in, day-out performance that comes with the advance of technology, figuring out when to deploy new technologies, not being too bleeding-edge, but also not a laggard when technology can enable the business results you're looking for. There is a balance between being technology-driven and business-driven. It's critical to find that balance, but it is not easy, even today.

It must have been somewhat easier at Cisco, right? You didn't have to convince the boss that technology could be useful.

You know, when I started at Cisco, in 1993, there were not a lot of technology companies that were leaders in the use of technology. A technology company that was really enabling itself with technology was a new concept. Large technology companies took technology for granted, to be honest. It was often companies in other businesses, such as banking, with the ATM machine, or companies like FedEx, that were the big stories of competitive advantage in IT. They didn't come out of IT companies. They came out of consumer-products companies. They came out of manufacturing companies, supply-chain companies. That culture had to be created within tech companies, including Cisco. I think that's part of what I was able to do there.

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